The discount on Greek government bond yields relative to those of Italy widened to its highest level since at least 1999 after the prime minister secured an election victory, underlining investors’ growing perceptions that Athens is now less risky than Rome.
The yield on 10-year benchmark Greek debt dipped by more than 0.15 percentage points to 3.85 per cent on Monday as markets responded positively to the result, which left Kyriakos Mitsotakis’s party just four seats short of the 150 needed for a parliamentary majority. A new vote is set for next month. Yields fall as prices rise.
The move means the gap — or spread — on Italian bond yields above Greek bond yields is now at its widest level since at least 1999, according to Bloomberg data. Italian debt yields 4.3 per cent.
Greece and Italy are viewed as two of the more risky debt markets in the EU but yields on Greek debt have traditionally been the higher of the two, reflecting the market’s worries about the country’s debt burden. Its yields rocketed during the Greek debt crisis in 2011 and 2012.
A couple of times the spread has briefly turned negative — meaning Greece’s borrowing costs were lower than those of Italy — most notably at the end of 2019.
Most recently, the spread turned negative again in April of this year and has been widening as Greece edges closer to restoring its investment grade status.
“For once, the market has got it right,” said Holger Schmieding, chief economist at German investment bank Berenberg.
“Italy is performing remarkably well under Giorgia Meloni. But under Kyriakos Mitsotakis, Greece has turned into the star performer among the more significant eurozone countries,” he said.
Both Greece and Italy have been among the bloc’s best performing bond markets this year. An ICE Bank of America Index of Italian bonds shows a total return of 2.7 per cent year to date, while its Greek counterpart has gained 4.2 per cent. That compares with a return of 1.2 per cent for the eurozone.
The fall in Greek 10-year bond yields on Monday narrowed their spread with German bonds — a popular risk measure — to 136 basis points, the lowest level since November 2021.
The surge in Greek bond prices was likely to have been fuelled by ‘fast money’ investors buying the bonds to front run any upgrade to investment grade status, which would open up Greek bonds to a wider pool of investors, say analysts.
Richard McGuire, head of rates strategy at Rabobank, said hedge funds closing out short positions, which surged in the run-up to the election, may also have boosted the Greek bond market on Monday.
According to Sean Kou, a rates strategist at Société Générale, “an [investment grade] upgrade [for Greece] is priced in now”.
After surging to 206 per cent during the pandemic, Greek government debt as a proportion of GDP was down to 171 per cent last year, its lowest level since 2012 and one of the most rapid rates of debt reduction in the world.
It is expected to keep falling in 2023, aided by high inflation, resilient growth and a primary budget surplus. Italy’s debt to GDP ended last year at 144.4 per cent, down from just below 150 per cent a year earlier.
Greece’s debt-to-GDP ratio “looks set to fall below that of Italy by 2026“, Berenberg’s Schmieding said. As well as strong growth, Greece also benefits from the fact that much of its debt is still owned by the EU institutions that bailed it out a decade ago and so it is “less exposed to rate hikes than other economies”.
Steffen Dyck, a senior vice-president at Moody’s, said the weekend’s election result was “a credit-positive” for Greece as it “would suggest continuity in fiscal and economic policies” and improved “the prospects for a further significant reduction” in the country’s debt burden.
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